James D. Schlicher - Page 12

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               Petitioner sold the Livermore residence and adjoining 5                
          acres for an adjusted sales price of $521,000, and realized a               
          gain from the sale of $419,000.  Under the provisions of section            
          1034(a), petitioner must recognize such gain to the extent that             
          the portion of the cost of the Clayton residence, which is                  
          allocable to residential use, is less than $521,000.  Petitioner            
          purchased 51 acres of undeveloped land in Clayton, California for           
          $380,000.  He also spent $146,922 to construct a residence,                 
          garage, and barn.  There is no dispute that the Livermore                   
          residence and adjoining 5 acres are to be treated as residential            
          in their entirety.  Moreover, the parties agree that the gain               
          realized from the sale of the Livermore property, to the extent             
          attributable to the portion of the Clayton property used for                
          petitioner's horse boarding and breeding business, does not                 
          qualify for section 1034(a) nonrecognition.  However, where the             
          parties diverge is with respect to the number of acres of the               
          Clayton property that petitioner used as his residence.  In                 
          making an allocation between residential and business use, we               
          note that neither the statute, nor the applicable regulation, nor           
          case law provides a specific method for determining what portion            
          of a realized gain is attributable to the nonresidential use of             
          the new residence.  Section 1.1034-1(c)(3)(ii), Income Tax Regs.,           
          merely states that "an allocation must be made."  Wigfall v.                
          Commissioner, T.C. Memo. 1982-171.                                          

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